Mortgage rates are now lower than at this time in 2013, despite the predictions of many economists who said interest levels would reach five percent or more this year. So what happened and why are interest rates in a ditch?
According to Freddie Mac, 30-year fixed-rate mortgage averaged 4.13 percent for the week ending July 17, 2014. A year ago the same loan averaged 4.37 percent.
Like snow on July 4th, the rates appearing today were not expected. The National Association of Realtors predicted that home loan rates this year would reach 5.4 percent, while the National Association of Home Builders forecast rates above five percent in 2014 and 5.5 percent in 2015. Given that about five months remain in the year, analysts' predictions could still come true, but as of mid-summer loan costs have stalled.
The Reasons for Lower Mortgage Rates
What happened? Why aren't rates higher?
A lot of factors push and pull at rates but there seem to be three major which explain why financing today is so cheap.
First, the lending system is flooded with cash. Maury Harris, managing director and chief U.S. economist at UBS, estimates that banks have more than $2 trillion of excess reserves.
Second, home sales are down. The National Association of Realtors says existing home sales in June were 2.3 percent below last year's numbers. New home starts are off even more, down 9.3 percent from 2012.
Third, because there have been record low interest rates during the past two years, refinancing demand is down sharply. The Mortgage Bankers Association expects refinancing activity to fall 60 percent this year.
These figures show there's a tremendous imbalance between supply and demand. There's plenty of cash to fund loans but demand is down and the result is falling loan rates. "For all of 2014," says Fannie Mae Chief Economist Doug Duncan, "we continue to expect total home sales to decline about two percent and total mortgage originations to decline approximately 41 percent. We also expect total single-family mortgage debt outstanding to rise slightly this year before strengthening further in 2015."
To make matters more interesting, the clearest reason for rate increases in 2013 relates to the Federal Reserve and the thought that it might slow or stop the purchase of mortgage-backed securities in the open market. The Fed has greatly slowed such purchases, and the results have been anything but economic mayhem justifying higher mortgage rates. "Mortgage interest rates have fallen to their lowest level in six months, and may struggle to surpass last fall's peak by the end of the year," said the Wall Street Journal in May. "Such a development could be a boon for the housing market slowed by a rise interest rates that began a year ago."
For borrowers, today's surprisingly-low mortgage rates are good news. For those in the market to buy a home or refinance a mortgage, lower rates make homes more affordable and lower monthly home costs.While low rates are enticing , though, there has been a lot of concern about "tight" lending practices. Low rates are plainly out there but what if no lender will approve a loan application?
Mortgage Closing Rate Increases
Would-be borrowers should rest assured that mortgage underwriting standards have in fact loosened significantly. According to EllieMae, increasingly more loans are successfully moving through the system. Their figures show that in June 60.7 percent of all mortgage applications closed, a big jump from the 54.3 percent closing rate a year earlier. The loans with the highest closing rates were VA purchase mortgages (68.7 percent) while VA refinancing mortgages had the lowest closing rate (43.8 percent).
For borrowers, the bottom line is this: Rates remain very low relative to historic standards. Standard & Poors says that during the past 40 years, mortgage rates averaged 8.6 percent so today's rates are barely half the cost that parents and grandparents would have paid for financing.
Consumers considering a home purchase or refinance should first check with LendingTree's LoanExplorer for the latest mortgage programs and options. Neither analysts nor consumers know what will happen in the future, but it's a fair assumption that mortgage rates today would have elated borrowers for most of the last several decades.